Chapter 5
Committee view and recommendations
Principle of allowing early termination fees
5.1
The banking sector in Australia is concentrated, with four large players
dominating the market. The committee recognises that it is important to support
the competitive process to enable smaller lenders to put more pressure on the
big banks, and thus create better outcomes for Australian consumers.
5.2
The committee is of the view, however, that the amendments to the
Banking Act proposed by Schedule 2 to this Bill are a misguided attempt to
support smaller lenders. The amendments will distort the market for consumer
credit and do not recognise that it is fundamentally important for competition
in that market for consumers to be able to shift between credit providers as
easily as possible, and with minimum disincentives.
5.3
While Schedule 1 to the Bill attempts to limit the negative consequences
of exit fees that their reintroduction by Schedule 2 could otherwise allow (by
requiring credit fees or charges to be 'reasonable'; that is not exceed the
credit provider's reasonable costs of undertaking the activity or service), it
is not clear why, as a matter of principle, it is acceptable for smaller
lenders to be allowed to impose certain anti‑competitive fees when other
banks cannot.
5.4
Furthermore, it would likely cause confusion and frustration for
consumers, the outcome of which could actually be a weakening of competition.
The Government's ban on exit fees was well-publicised before its commencement
(and welcomed by consumer groups) and is now in force. Consumers are likely to
be of the understanding that exit fees have been banned for all lenders. If they
are now charged an exit fee by a smaller lender, it could significantly damage
the perception of smaller ADIs and the non-bank sector.
Approach taken in Schedule 2 to the Bill
5.5
Another issue with Schedule 2 is that it is not clear that it will, as
currently drafted, actually achieve its aim. The Bill does not repeal the ban
on certain termination fees related to household loans made under the NCCP Regulations;
instead, it amends the Banking Act to require APRA to prohibit large banks from
being able to impose any early termination fees.
5.6
As a result, there appears to be some overlap which could lead to
possible conflict between statutes if Schedule 2 is passed in its current form.
For the major banks, it seems they would be prohibited from imposed termination
fees related to household loans by both the NCCP Regulations and their banking
authority because of the amendments proposed by the Bill. On the other hand,
the Bill would apply to a smaller group of entities (only major banks),
compared to the regulations which apply to all relevant credit providers, but a
much broader range of products—both within the consumer credit sphere and in
other areas of banking.
5.7
With both statutes in place, it appears possible that a large bank could
breach both the condition of their section 9 authority that the Bill would
impose, as well as the regulations related to the National Credit Code.
5.8
Also, if both statutes are in place, the intent of the Bill may not be
realised. Senator Xenophon stated:
This provision will ensure that only small, independent
financial organisations will be able to apply reasonable fees to recoup some of
their costs.[1]
5.9
But if the regulations made by the Government to ban certain types of
termination fees remain in place, smaller lenders (both banks and non‑banks)
would still be prohibited from imposing those fees. The Bill does not expressly
give them permission to impose them—it simply says large banks may not. It
seems larger banks would just be prohibited from imposing early termination fees
on a wider range of products and contracts.
5.10
It is likely that these aspects of the Bill will cause interpretational
difficulties. If passed, Schedule 2 to the Bill could create significant burden
and uncertainty for the businesses affected until such time as any
uncertainties are resolved.
Schedule 1 to the Bill
5.11
As noted earlier, the requirement in Schedule 1 to the Bill that credit
fees and charges be 'reasonable' is clearly linked to Schedule 2. However, it
is also possible to consider Schedule 1 in isolation.
5.12
Following agreements made at COAG, in recent years a comprehensive
reform of consumer credit law and consumer law more generally has been
undertaken. New laws against unjust transactions, unconscionable establishment
and early termination fees and unfair terms in standard form contracts
commenced on 1 July 2010. Coupled with the recent ban on early termination
fees associated with variable rate loans for residential mortgages, laws in
this area appear quite thorough. No evidence from this inquiry identified a
deficiency in the current framework which requires the amendments proposed by
Schedule 1 to be enacted.
5.13
Further, if Schedule 1 is passed, this could create a tension between
where the need for reasonableness under the Bill ends and where the challenge
to unjust transactions, unconscionable fees and unfair contract terms under the
existing laws begins.
Recommendation 1
5.14 The committee recommends that the Senate reject the Bill.
Senator Mark Bishop
Chair
Navigation: Previous Page | Contents | Next Page